Fracking’s future still on hold

By: Phillip Karig

June 22, 2012

The past five years have witnessed an almost complete turnaround in the prospects for key resins production in North America.

The feared flood of new Middle Eastern resin capacity has not swamped domestic resin producers and the industry has avoided its feared fate of being just another victim of globalization. What a difference a few years makes.

The resulting abundance of low-cost natural gas has transformed North American producers of resins such as polyethylene, which are favored by lighter natural gas-based feedstocks, into some of the most cost-competitive producers in the world. Conversely, resins such as polypropylene that are more dependent on heavier crude oil-based feedstocks have been rendered increasingly volatile and uncompetitive due to the substantially smaller quantities of propylene produced from cracking natural gas liquids.

But the place of domestic resin producers is not set in stone, especially because fracking and the plastics industry are at a crossroads subject to the influences of economics — but also politics.

Economics

Natural gas prices in North America are well below the price of crude oil on an energy-equivalent basis because of an underdeveloped global infrastructure for importing and exporting natural gas.

A barrel of oil contains about six times the energy of a thousand cubic feet of natural gas and should trend toward selling for six times as much. Recently it has sold for more than 50 times, well over many projections and a main driver for increased light feedstocks usage.

Why then, are domestic PE prices not lower?

First, resin is easy to export to higher-priced markets. Second, most of the rest of the world produces PE from crude oil-based feedstocks. And third, the market price of commodities is typically based on the marginal production costs of the highest-cost producers. Oil-based producers won’t sell below their raw materials costs for long — and gas-based producers know it and price accordingly.

But things could change quickly if other countries adopt the latest fracking technology and decide to build more crackers capable of exploiting the resulting natural gas.

Politics

The geographic areas most likely to benefit from fracking and those most likely to be opposed closely mirror the overall Republican-Democratic divide in the U.S. The Marcellus Shale approximates the Appalachians, made famous for “guns and religion” in the 2008 election, while most of the other large shale deposits are in areas such as Republican-leaning Texas and the libertarian-leaning Rockies and Great Plains. Shale deposits are much less common along the more traditionally liberal East and West Coasts.

As a result, the 2012 elections could be critical to the long-term future of fracking and the plastics industry as the elections’ winners may be driven as much by their political leanings as by economics.

Phillip Karig is managing director of Mathelin Bay Associates LLC consulting firm, based in St. Louis and Berlin. The column above was adapted from his presentation to the Institute of Scrap Recycling Industries annual convention on April 17.